Gold and silver produce strong showings in fourth quarter

December 31st, 2018

In September, when gold was trading in the $1200 range, Morgan Stanley, a major Wall Street investment house, predicted $1300 gold by year end. It’s now year-end, and gold did not hit $1300; however, it did climb to $1280, making the forecast a really good one.

Two developments that Morgan Stanley thought could send gold upward were a “Federal Reserve policy error” and pending additional tariffs on Chinese imports. If raising interest rates was the error MS was looking for, they got it.

On December 20, the Fed boosted its fed funds rate target to 2.25%/2.50%. As for additional tariffs, they have been put on hold while US and China negotiators try to come to an amicable agreement on trade. For the first nine months of 2018, the US. trade deficit added up to almost $447 billion, compared to about $404.5 billion in the same span in 2017. The U.S. is on track to post its biggest deficit in a decade.

Since the 1980s, the US has run a trade deficit in the trillions of dollars with China. Trump campaigned on rectifying the situation, and his solution are tariffs. Meanwhile, the Chinese has said that they “will not be dictated to.” A US-China trade war could get really ugly.

In their report, Morgan Stanley noted that “US (stock) markets continue to shrug off global stresses. . .” However, stock investors did an about face in the fourth quarter, with stock indexes suffering some of the most volatile days in decades and ending the year 12% lower.

Gold and silver, on the other hand, headed north. Further, silver gained on gold with the gold/silver ratio (GSR) dropping from 85 to 83.13. When gold was trading at $1200 in September, silver was in the $14.15 range. Since then, gold has risen 7% while silver has climbed 18%.

There has been no “normal” GSR for decades. However, GSRs above 70 in recent years have meant greater upside potential in silver than in gold. Typically, smaller investors should go with silver while larger investors should buy a mix of gold and silver, the mix depending on how willing they are to handle silver’s bulk and weight.

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